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Chinese Gold Demand To Rise 20% By 2017, Urbanization Main Driver

(Kitco News) - New York — When China became the world’s largest gold market in 2013, the question that ultimately followed was, can this growth be sustained, said Albert Cheng, Managing Director of the World Gold Council.

The WGC released its latest report focused on China’s appetite for gold on Tuesday with the intent of addressing the sustainability of the market. The report found that private sector demand for gold in China is set to increase from the current level of 1,132 tonnes per year to at least 1,350t by 2017 – a growth of 20% over the next four years.

The global market should look to China as one of the engines of the global gold market, the other being India in that equation, said Cheng in an exclusive interview with Kitco News at the WGC’s headquarters in New York.

China officially became the top gold-consuming nation in 2013, as India, the previous title holder, severely restricted gold imports in an attempt to narrow is massive current account deficit.

Although there is some uncertainty in the short-term over China’s growth prospects, Cheng is not dissuaded that the economy will continue to expand. He added the country is in a period of “transition” and to be expected.

However, He said that the next six years will see China’s middle class grow from 200 million people to 500 million. “Comparing this to the total population of the US, which stands at 319m, puts the size of this new market of affluent consumers, with the propensity to buy gold, in perspective,” the WGC’s report said.

The sheer number of China’s population alone is enough of an indicator to sustain the demand for gold said Cheng. China’s continuing urbanization means that it now has 170 cities with more than one million inhabitants, he said.

And the report suggests the population has the disposable income to impact the gold market. “Chinese savings levels remain high, with an estimated US$7.5 trillion in Chinese bank accounts, despite household allocations to gold of around just $300bn,” highlights from the report said.

The report found that Chinese investors prefer physical gold over paper. It also said that in the medium term demand for bars and coins could reach 500t by 2017 -a rise of nearly 25% above the record level set last year.

China’s support for gold is also unwavering. “China has become the world’s number one jewelry market, nearly trebling in size over the past decade – at 669t in 2013, it accounts for 30% of global jewelry demand,” the WGC report said. The WGC estimates that demand will reach 780t by 2017.

The report said that 40% of Chinese jewelry consumption relates to weddings.

“Once the gold investor in China buys gold, it becomes sticky; it is not as tradable as we see in the U.S. – It is long-term,” said Cheng.

The biggest mistake investors can make is to draw the same analysis, comparing the Chinese gold market and the U.S. said Cheng. Understanding the mentality of the Chinese buyer is fundamental to having a solid grasp of the global gold market, he said.

“[They] look at what currently happens in the US market and use the same analysis to analyze the Chinese market, but the consumer behavior is different,” said Cheng. The Chinese buyer is more of a ‘bargain hunter’ than a ‘momentum buyer and are less price sensitive. “They want to buy to protect themselves from rainy days,’ said Cheng.

Official Gold Holdings

The WGC’s report also found that official gold holdings in China totaled 1,054t at the end of 2013 – making it the world’s sixth largest holder of bullion.

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